Pound Charges To 5 Week High Versus Euro On Brexit Optimism

23.01.18
4 minute read
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Brexit optimism boosted the pound versus the euro on Monday. Sterling rallied over 0.6% against the common currency on the first day of the trading week, which was also very light on economic data for both sides. The exchange rate hit a high of €1.1422, which is the strongest level that the pound has traded at versus the euro in five weeks.

What do these figures mean?

When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.

For example, it could be written: 1 GBP = 1.13990 EUR

Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. If the euro amount increases in this pairing, it’s positive for the pound.

Or, if you were looking at it the other way around: 1 EUR = 0.87271 GBP

In this example, €1 is equivalent to approximately £0.87. This measures the euro’s worth versus the British pound. If the sterling number gets larger, it’s good news for the euro.

There were no new economic data releases driving the pound higher in the previous session. Optimism surrounding Brexit was the principal factor pushing the pound higher, as market participants become increasingly hopeful that the UK will secure a good transitional deal and potentially a better Brexit deal than had initially been thought. A transitional period will make a softer Brexit more likely, which is favourable for the pound, however there has been very little mentioned regarding a transitional period since the Brexit Bill was agreed before Christmas.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

High impacting U.K. data is once again in short supply today, before the calendar starts to fill up towards the end of the week. Market participants are expected to look towards the U.K. trade balance, which could provide some volatility for the pound. Analysts are forecasting a reduction in public sector net borrowing deficit. Other data today includes a report from the Confederation of British Industry, which analysts believe will show a decline in industrial orders.

Eurozone Sentiment Data in Focus

The euro continued to reap the benefits of political developments in Germany, over the weekend. The SPD socialist party agreed to formally enter coalition talks with with Angela Merkel’s Conservative CDU party, opening the route to a grand coalition. However, the divide in the SPD party was clear with 362 voting in favour of coalition talks and 279 voting against. This highlights the potential difficulties that the upcoming discussions will face.

The eurozone has a very busy week as far as economic releases are concerned. Today investors will be focusing on sentiment indicators with ZEW sentiment surveys due from Germany and the eurozone, in addition to eurozone consumer confidence data.

Current estimates point to increasing confidence in the eurozone, in addition to increased positivity regarding the German economy. Should the data come in even stronger than forecasts, the euro could climb higher versus the pound.

Why does strong economic data boost a country’s currency?
Solid economic indicators point to a strong economy. Strong economies have strong currencies because institutions look to invest in countries where growth prospects are high. These institutions require local currency to invest in the country, thus increasing demand and pushing up the money’s worth. So, when a country or region has good economic news, the value of the currency tends to rise.
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